When is a Reverse Mortgage Not a Good Solution?

Although a reverse mortgage may be the answer for house-rich and cash-poor retirees, they are not for everyone. Reverse mortgages are best suited for people who plan to stay in their homes permanently, so if you are planning on moving in the near future or there is a possibility you will have to move—e.g., due to illness—the reverse mortgage makes no sense.  It is important to consider eldercare plans when considering a reverse mortgage.

Also, if you already have a substantial mortgage on your home, the reverse mortgage is probably not for you, since you will have to pay it off before you can become eligible.

If you want to pass your home to your children or heirs, the reverse mortgage is not a good alternative for you, since you will in essence be using up the equity in your home – leaving fewer assets for distribution in the future.  The impact of reverse mortgages on estate planning must be weighed carefully.

You should also be aware that:

• Reverse mortgages tend to be more costly than traditional loans because they are rising-debt loans. The interest is added to the principal loan balance each month. So, the total amount of interest owed increases significantly with time as the interest compounds.
• Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off in part or whole.
• Because you retain title to your home, you remain responsible for taxes, insurance, fuel, maintenance, and other housing expenses